Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Maman-Cargo Terminals & Handling (TLV:MMAN), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Maman-Cargo Terminals & Handling, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.04 = ₪57m ÷ (₪1.8b – ₪396m) (Based on the trailing twelve months to September 2020).
So, Maman-Cargo Terminals & Handling has an ROCE of 4.0%. In absolute terms, that’s a low return but it’s around the Infrastructure industry average of 4.8%.
View our latest analysis for Maman-Cargo Terminals & Handling
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Maman-Cargo Terminals & Handling, check out these free graphs here.
So How Is Maman-Cargo Terminals & Handling’s ROCE Trending?
In terms of Maman-Cargo Terminals & Handling’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 4.0% from 5.7% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
The Key Takeaway
In summary, we’re somewhat concerned by Maman-Cargo Terminals & Handling’s diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.
One final note, you should learn about the 5 warning signs we’ve spotted with Maman-Cargo Terminals & Handling (including 2 which can’t be ignored) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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